Oil Market Report: 16 May 2017

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Highlights

  • Weakness in a number of previously solid countries - India, US, Germany and Turkey - curtailed the 1H17 global demand growth estimate by 115 kb/d. Global demand growth is, however, still forecast at 1.3 mb/d in 2017, with demand at 97.9 mb/d.
  • Global oil supply fell by 140 kb/d in April as non-OPEC, and especially Canada, pumped less. At 96.17 mb/d, output stood 90 kb/d below a year ago, even as non-OPEC returned to growth. Non-OPEC supply is set to increase 600 kb/d in 2017.
  • OPEC crude production rose by 65 kb/d in April to 31.78 mb/d as higher output from Nigeria and Saudi Arabia more than offset lower flows from Libya and Iran. Crude production was down 535 kb/d compared to April 2016. Year-to-date compliance with production cuts remained robust at 96%.
  • OECD commercial stocks decreased for a second straight month in March, by 32.9 mb (1.1 mb/d), to 3 025 mb. Product stocks fell sharply on lower refinery output and increased exports. For 1Q17 as a whole, OECD stocks were up 24.1 mb (0.3 mb/d) due to a large build in January. Preliminary data suggests OECD stocks increased in April.
  • Benchmark oil prices fell after 11 April and traded close to their late- November level, before the OPEC output deal. They rose on 15 May after Russia and Saudi Arabia indicated support for an extension of the production cuts. Sour grades continued to trade higher than sweet crudes.
  • In 2Q17, global refining activity slows down seasonally, lower by 370 kb/d from 1Q17, but is set to ramp up by 2.4 mb/d by July-August. The OECD leads the way: in non-OECD areas, maintenance and refinery closures in the Middle East, underperformance in Latin America and flat growth in India are not offset by growth in China and Russia.

Decision time

This report is published nine days before OPEC's ministerial meeting and, ahead of the deliberations, in this Report we show that in 1Q17 the oil market was almost balanced with a global stock build of 0.1 mb/d. For OECD countries, stocks grew by 0.3 mb/d for 1Q17 as a whole, nearly offset by observed falls in floating stocks and in other centres. In March, total OECD stocks did fall by about 1 mb/d.

It has taken some time for stocks to reflect lower supply when volumes produced before output cuts by OPEC and eleven non-OPEC countries took effect are still being absorbed by the market. In 1Q17, we might not have seen a resounding return to deficits but this Report confirms our recent message that re-balancing is essentially here and, in the short term at least, is accelerating.

Looking at 2Q17, if we assume that April's OPEC crude oil production level of 31.8 mb/d is maintained, and nothing changes elsewhere in the balance, there is an implied stock draw of 0.7 mb/d. Adopting the same scenario approach for the second half of 2017, the stock draws are likely to be even greater. Even if this turns out to be the case, stocks at the end of 2017 might not have fallen to the five-year average, suggesting that much work remains to be done in the second half of 2017 to drain them further. In addition to production cuts and steady demand growth, a major contribution to falling crude stocks in the next few months will be a ramp-up in global crude oil runs. Starting in March, refinery activity is building up and by July global crude throughputs will have increased by 2.7 mb/d.

Of course, things will change elsewhere in the balance, and today the most closely watched data point on the supply side is US crude production. In February, it increased again, this time by nearly 200 kb/d and, at 9.03 mb/d, was the highest since March last year. After bottoming out in September, output has increased by nearly 465 kb/d. In line with stronger recent performance from the US shale sector we have revised upwards our expectation throughout 2017 and we now expect total US crude production to exit the year 790 kb/d higher than at the end of 2016, which is an upward revision of 100 kb/d since last month's Report. Such is the diversity and dynamism of the US shale sector that our numbers are likely to be a moving target as 2017 progresses. The overall outlook for the non-OPEC countries, eleven of which are voluntarily cutting production to support OPEC, shows growth in 2017 of nearly 600 kb/d, an increase on the 490 kb/d seen in last month's Report.

While compliance with the agreed production cuts by OPEC and the eleven non-OPEC countries has generally been strong, we need to keep a close eye on Libya and Nigeria where there are signs that production might be rising sustainably. According to preliminary data, Libyan production reached 800 kb/d in May, the highest level since 2014, and any significant increase clearly offsets cutbacks by other OPEC and non-OPEC countries.

As for demand, we have left unchanged our headline growth number for 2017 at 1.3 mb/d. Growth was weaker than expected in 1Q17, however, with notable downward revisions seen in the US (where demand is essentially flat), Germany, Turkey and India (where the effect of the currency reform lingers on).

In the June edition of this Report, we will publish our first quarterly demand and supply estimates for 2018, which, amongst other things, will provide insight on the likely call on OPEC crude and stocks. In the meantime, we wait to see what OPEC decides and to consider the likely implications for the rest of 2017.

Demand

Summary

  • Global oil demand is forecast to rise by 1.3 mb/d in 2017, to 97.9 mb/d, remaining on a decelerating trend compared to 2016 and 2015. The outlook has been slightly downgraded by 45 kb/d compared to last month's Report on a now lower 1H17 estimate.
  • The main contributors to the reduced 1H17 global demand estimate were the apparent slowdowns in some of the previously stalwart growth countries:  Germany, Turkey and India in 1Q17 and the US in 2Q17.
  • Official data show US demand at 19.2 mb/d in February, not only 0.5 mb/d below last February but also significantly under the levels implied by weekly statistics. Weekly data suggests further weakness in April and, hence, the forecast for the year as a whole is downgraded. We now show flat US demand in 2017.
  • Chinese demand remains relatively strong, with a near 425 kb/d year-on-year (y-o-y) gain in 1Q17 providing significant support to the overall Chinese demand gain of 400 kb/d forecast for 2017 as a whole. The transport and petrochemical sectors remain the main drivers, supported by rapid vehicle sales, relatively robust economic activity and continued expansions in the petrochemical sector. China accounts for roughly one-third of global oil demand growth in 2017.
  • Many other Asian economies also posted significant y-o-y gains in 1Q17. The Philippines, Chinese Taipei, Pakistan and Hong Kong were all up sharply in 1Q17 according to preliminary estimates, pulled higher by sharp gains in industrial oil use and the transport sector. Non-OECD Asian countries, excluding China, are forecast to account for 43% of global demand growth in 2017.
  • India's demonetisation policy continues to cast a long shadow over oil demand, which in March was roughly unchanged y-o-y leaving negative growth for 1Q17 as a whole. The 2017 forecast has been curtailed by 40 kb/d compared to last month's Report to show growth of just below 200 kb/d, or 4.6%. India is forecast to account for roughly 15% of global oil demand growth in 2017.

Supply

Summary

  • Global oil supply declined by 140 kb/d in April as non-OPEC, and especially Canada, pumped less. At 96.17 mb/d, production stood 90 kb/d below a year ago. Non-OPEC output was up versus a year ago whereas OPEC production fell.
  • OPEC crude production rose by 65 kb/d in April to 31.78 mb/d as higher output from Nigeria and Saudi Arabia more than made up for lower flows from Libya and Iran. Output from members bound by the six-month production deal edged higher, but average compliance remained robust at 96%. Crude production was down 535 kb/d compared to April 2016, the largest year-on-year (y-o-y) decline in nearly three years.
  • OPEC meets on 25 May to review output policy. Saudi Arabia and Russia favour extending supply cuts through 1Q18 and are working to build a consensus before oil ministers meet in Vienna. In the meantime, data show OPEC is estimated to have earned more in 1Q17 while pumping less. Supply fell by around 4% versus a record-setting 4Q16 while estimated daily revenue was up nearly 5%.
  • Libya and Nigeria, exempt from OPEC cuts, have yet to challenge the supply pact with a substantial increase in output. Both, however, appear to be making a production comeback. On average from January through April, the two producers between them have added only 60 kb/d compared to an October baseline. By mid-May, however, Libyan output had made an impressive recovery and Nigerian supply could get a boost after the restart of a key export terminal.
  • Non-OPEC oil production dropped by 255 kb/d in April, as producers subject to the output cut agreement stepped up compliance and Canadian oil sands output slipped on unscheduled shutdowns. Total non-OPEC output nevertheless stood 310 kb/d above year earlier levels, with renewed growth in the US adding to gains from Brazil, Canada, Kazakhstan and Russia. Total non-OPEC liquids is forecast to increase 600 kb/d in 2017.
  • The outlook for US oil supplies is improving. Total oil output leapt above year-earlier levels for the first time in more than a year in February, surging by just over 500 kb/d versus January. While up 195 kb/d month-on-month (m-o-m), US crude oil production remained below a year ago. Vigorous drilling activity is expected to erode annual declines by April and underpin a 345 kb/d increase in full year US crude oil supply.

All world oil supply data for April discussed in this report are IEA estimates. Estimates for OPEC countries, Alaska, China, Kazakhstan and Russia are supported by preliminary April supply data.

Stocks

Summary

  • OECD industry stocks fell for a second consecutive month in March, by 32.9 mb, to 3 025 mb. For 1Q17 as a whole, stocks were up 24.1 mb due to a large build in January that was not offset by draws in February and March.
  • Commercial crude stocks in the OECD reached a fresh historical high in March, thanks to steady crude imports, lower demand from refiners and higher US production. Product stocks fell by a larger-than-seasonal 37.8 mb on lower refinery output and increased exports outside the OECD.
  • Preliminary data show oil stocks in the OECD rising by 16.2 mb in April, which helps to explain the fall in oil prices seen in the second half of April.
  • Chinese crude stocks built by 85-100 mb (700-800kb/d) in 1Q17 on higher crude imports, with independent refiners in the northeast rushing to use their quotas.

Prices

Summary

  • Benchmark crude prices rose by $1-2/bbl on average in April, but after 11 April they fell and traded close to their level in late November, before the OPEC output cut agreement. They rose on 15 May after Russia and Saudi Arabia confirmed their intention to extend the deal.
  • Money managers cut their net long positions in crude futures by 35 mb at the start of May in reaction to lower prices and weaker sentiment. Net length was down 30% from the peak in March.
  • Sour crude grades continued to trade higher than sweet ones. The price spread between Brent and Dubai fell to a seven-year low, pulling crude flows from the Atlantic Basin to Asia.
  • Gasoline and fuel oil differentials were boosted by higher demand. Freight rates for crude and clean tankers rose in some regions, but remained low by historical norms.

Refining

Summary

  • Global refinery throughput in 1Q17 reached 80 mb/d, up 190 kb/d year-on-year (y-o-y), roughly on par with 4Q16 levels.
  • In 2Q17 refinery intake is set to drop seasonally 470 kb/d from 1Q17, with y-o-y growth revised lower to 740 kb/d due to a downgraded forecast for Latin America and the Middle East.
  • From the seasonal lows of March, throughput is expected to ramp-up by 2.7 mb/d by July-August. Global refinery intake reaches a record 82 mb/d, up on average 1.1 mb/d y-o-y.